introduction to behavioral economics
Post on 26-May-2015
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It is the result of thinking, not the process of thinking, that appears spontaneously in consciousness.
George Miller
Biases or Shortcuts• Anchoring• Availability• Representativeness• Optimism and overconfidence• Gains and Losses• Status Quo• Framing
• AnchoringThe concept of anchoring draws on the tendency to attach or "anchor" our thoughts to a reference point - even though it may have no logical relevance to the decision at hand. It is an art of how you ask the question, how you set the anchor.
• Known anchoring methods–Multiple unit pricing–Purchase quantity limits–Initial price setting–Subconcious anchoring
• AvailabilityThe availability bias is a mental shortcut that relies on immediate examples that come to mind.
• Hedonic AdaptationLimited joy makes us happier than unlimited joy
• The goal gradient effect
If there is a progress we tend to finish
Bank workerorBank worker and active in the feminist movement?
• Expectancy Effect
Pattern recognition based on expectations
• Optimism and overconfidence
MBA students were asked the probability to be lower than %50 of grades, only %5 expected to be below the median
• Gains and losses (endowment effect)
Losing something makes you twice as miserable as gaining the same thing makes you happy.
–Visualization–Framing
• Status Quo
To maintain the status quo is to keep the things the way they presently are.
• Hindsight bias–Better-educated soldiers suffered more
adjustment problems than did less-educated soldiers.–White privates were more eager for
promotion than were Black privates.
• Change Blindness– Perceptual phenomenon that occurs
when a change in a visual stimulus is introduced and the observer does not notice it.
• RegretStay passive to remain invulnurable to regret
• PoignancyEmpathy for people in regret
• FramingIt is an inevitable process of selective influence over the individual's perception of the meanings attributed to words or phrases
• Decision point
• Transaction cost
• Reminder
• Intervention
• Mental Accounting
The concept defined by the economist Richard Thaler that states people split up their future and current assets into separate portions that cannot be transferred. It states that people give different value to different asset groups and this determines purchasing decisions.
• Sunk cost effect
The sunk cost effect is the tendency for humans to continue investing in something that clearly isn't working.
• Choice overloadMany choices cause complicated computation resulting with psychological pressure.
– Regret– Joint Evaluation vs Seperate
Evaluation
PRIMING• Associative coherence• Repetition (direct priming)• Semantic• Response priming• Masked priming
• Associative Coherence
BANANAS VOMIT
• Repetition
DOGDOGDOGDOG
• Semantic priming
DOG WOLF
• Response priming
COGNITIVE EASE• Different Reports Experiment–Taahhut VS Artan
• Stocks statistics–KAR & LUNMO VS PXG & RDO
• Happiness increases easier options
False Consensus Effect• There is a tendency for people to assume
that their own opinions, beliefs, preferences, values, and habits are "normal" and that others also think the same way that they do.
Fundamental Attribution Error• is people's tendency to place an undue
emphasis on internal characteristics to explain someone else's behavior in a given situation, rather than considering external factors.
Actor-observer bias• People tend to overemphasize the role of
a situation in their behaviors and underemphasize the role of their own personalities.
INTUITION VS ALGORITHMS
BAD EVENTS
• The brains of humans contain a mechanism that is designed to give priority to bad news.
RARE EVENTS
• Decision weight change from 0% to 1% is a lot higher than %50 to %51
THE PLANNING FALLACY
• Unrealistically close to best-case scenarios
Bernoulli Utility Function
Prospect Theory
Prospect Theory
1. You are given $1000a) 50% chance to win $1000b) $500 for sure
2. You are given $2000a) 50% chance to lose $1000b) Lose $500 for sure
Imperfection of Prospect Theory
1. Problema) 90% chance to win $1 millionb) $50 for sure
2. Problema) 90% chance to win $1 millionb) $150,000 for sure
WELL BEING
• Peak-end rule• Duration neglect• The experiencing self vs. the
remembering self
Tastes and Decisions are Shaped by Memories, and the
memories can be wrong
Remembering Self VS
Experiencing Self
The resistance to interruption is a sign that you are having a
good time
JOB SATISFACTION
HAPPINESS
GOVERNMENT INVESTMENT
EXPERIMENTING
• Cause -> mediator -> effect• Pennies a day -> perception of
affordability -> greater spending• Daily payment amount -> moderator• Field experiments & Lab experiments
• ANOVAAnalysis of variance (ANOVA) is a collection of statistical models used to analyze the differences between group means and their associated procedures.
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